Background
Alongside the publication of its code of practice for the commercial property sector on Friday (19 June 2020), the government also announced that it had put forward, and would be putting forward further, legislation to extend each of the current measures enacted in [May] to protect commercial tenants. These measures include the suspension of the right for a landlord to forfeit a lease for non-payment of rents, restrictions applicable to the use of Commercial Rent Arrears Recovery and a ban on the use of statutory demands and winding-up petitions (see our article describing these measures in more detail). The new legislation will extend these protections, which were initially put in place to protect tenants during the period until 30 June, to now also cover the period until 30 September (again, falling shortly after the September rent quarter day).
Implications and options
We saw, following the March quarter day, that commercial rents were substantially reduced (estimated to be approximately 60 percent across the sector). Notwithstanding the easing of lockdown and some recent positive retail figures, with the passing of a further three months since the March rent quarter date (during most of which time the economy has been in decline) it is anticipated that rental receipts will be further reduced this month. Whilst for many tenants this is an issue of 'can’t pay', it has been reported that for a proportion it is instead a case of 'won’t pay' (whether to protect cashflow for further down the line or otherwise), and the government’s measures have removed many of the options which a commercial landlord might have otherwise looked to rely upon, substantially weakening its bargaining position.
Clearly some measures were needed to ensure tenants, particularly those hardest hit by the pandemic and resulting 'lockdown', were protected. Arguably, however, the government’s measures simply pushed the problem down the line – passing some of the pain on to landlords. With the extension of these protections, some landlords could be facing up to 5 months’ arrears of rents with no protection or support (other than in the form of CBILS, CLBILS and similar additional borrowings).
For many landlord-tenant relationships, the position is further complicated by debt service obligations owed by the landlord secured on the relevant property. In many cases, landlords rely upon their contacted rents to service such obligations and the non-payment or withholding of rents is likely (if not already) to result in payment defaults on such debts as well as breaches of other obligations (most notably financial covenants looking to passing rents or EBIT).
Whilst calls for financial support to the commercial property sector (including the Furloughed Space Grant Scheme) have been largely unanswered, the publication of the code of practice does provide a framework for discussion between tenants, landlords and, to some extent, lenders and offers a number of suggested options which may provide a more equitable means of mitigating and managing the economic issues facing tenants and landlords.
As ever, managing these situations requires communication ensuring that all interested parties can agree to a workable solution.
Get in touch with Richard Leeming, Chris Preston or Alistair Rattray if you would like to discuss any of the issues detailed in this article.